Rachel Reeves's tax dilemma is about to get ugly
For close watchers of Britain's economy, last week was dominated by the Government's spending review, stuffed full of numbers of dubious validity, and the political theatre surrounding its delivery in the House of Commons.
The event had about it a distinct air of unreality. We all know that the real event will be the budget in Autumn, when the Rachel Reeves will have to confront whatever depressing new economic and financial forecasts are given to her by the Office for Budget Responsibility and to grapple with the horrible reality of surging public debt.
Of course, she could react by redefining her fiscal rules to allow more borrowing. After all, this is a well-trodden path.
But if she wishes to maintain a shred of fiscal credibility, she will be forced to announce spending cuts or tax increases – or both. Bearing in mind the politics within the Labour Party and public opinion in the country, we are expecting higher taxes. And it is going to be ugly.
At least last week the Chancellor could take comfort from the fact that the financial markets were, as expected, unfazed by the spending review.
This does not imply that they are unworried by the huge amount of public debt. Quite the opposite. It is simply that there was nothing in the review that was surprising. They know that the big questions about the economy and fiscal policy remain exactly the same as they were beforehand.
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